10-Q 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number: 0-27432 ------- CLEAN DIESEL TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) Delaware 06-1393453 --------------- --------------------------- (State of Incorporation) (I.R.S. Employer Identification No.) Clean Diesel Technologies, Inc. 300 Atlantic Street - Suite 702 Stamford, CT 06901-3522 (Address of principal executive offices) (Zip Code) (203) 327-7050 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No X --- --- As of November 11, 2004, there were outstanding 17,164,868 shares of Common Stock, par value $0.05 per share, of the registrant. ================================================================================ CLEAN DIESEL TECHNOLOGIES, INC. Form 10-Q for the Quarter Ended September 30, 2004 INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Condensed Financial Statements Balance Sheets as of September 30, 2004 (Unaudited), 3 and December 31, 2003 Statements of Operations for the Three and Nine Months 4 Ended September 30, 2004 and 2003 (Unaudited) Statements of Cash Flows for the Nine Months 5 Ended September 30, 2004 and 2003 (Unaudited) Note to Financial Statements 6 Item 2. Management's Discussion and Analysis of 10 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk 11 Item 4. Controls and Procedures 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 2. Changes in Securities 13 Item 3. Defaults upon Senior Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES & CERTIFICATIONS 14 - 2 -
PART I. FINANCIAL INFORMATION Item 1. Condensed Financial Statements CLEAN DIESEL TECHNOLOGIES, INC. CONDENSED BALANCE SHEETS (in thousands, except share data) SEPTEMBER 30, December 31, ------------------------------ 2004 2003 (Unaudited) -------------- -------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 5,408 $ 6,515 Accounts receivable, net of allowance of $10 and $3 in 2004 and 2003, respectively 178 115 Inventories 443 320 Other current assets 54 73 -------------- -------------- TOTAL CURRENT ASSETS 6,083 7,023 Patents, net 324 274 Fixed assets, net of accumulated depreciation of $163 in 2004 and $123 in 2003, respectively 206 126 Other assets 27 18 -------------- -------------- TOTAL ASSETS $ 6,640 $ 7,441 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Deferred compensation and pension benefits $ 441 $ 441 Accounts payable and accrued expenses 713 427 -------------- -------------- TOTAL CURRENT LIABILITIES 1,154 868 STOCKHOLDERS' EQUITY: Preferred Stock, par value $0.05 per share, authorized 100,000 and 80,000 respectively, no shares issued and outstanding -- -- Series A Convertible Preferred Stock, par value $0.05 per share, $500 per share liquidation preference, authorized -- 0 and 20,000 shares respectively, no shares issued -- -- and outstanding Common Stock, par value $0.05 per share, authorized 30,000,000 shares, issued and outstanding 16,738,368 and 15,679,337 shares respectively 837 784 Additional paid-in capital 37,609 35,813 Accumulated deficit (32,960) (30,024) -------------- -------------- TOTAL STOCKHOLDERS' EQUITY 5,486 6,573 -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,640 $ 7,441 ============== ==============
See notes to condensed financial statements. - 3 -
CLEAN DIESEL TECHNOLOGIES, INC. CONDENSED STATEMENTS OF OPERATIONS (Unaudited) (in thousands except per share data) Three Months Ended Nine Months Ended September 30, September 30, 2004 2003 2004 2003 ----------- ------------ ------------ ------------ Revenue: Product revenue $ 223 $ 81 $ 479 $ 291 License and royalty revenue 18 18 49 187 ----------- ------------ ------------ ------------ Total revenue 241 99 528 478 Costs and expenses: Cost of product sales 149 47 334 167 General and administrative 1,150 517 2,761 1,855 Research and development 174 171 344 590 Patent amortization and other expense 22 29 61 29 ----------- ------------ ------------ ------------ Loss from operations (1,254) (665) (2,972) (2,163) Interest income 11 1 36 7 ----------- ------------ ------------ ------------ Net loss $ (1,243) $ (664) $ (2,936) $ (2,156) =========== ============ ============ ============ Basic and diluted loss per common share $ (0.08) $ (0.05) $ (0.19) $ (0.18) =========== ============ ============ ============ Weighted average number of common shares outstanding - basic and diluted 15,757 12,119 15,719 12,021 =========== ============ ============ ============
See notes to condensed financial statements. - 4 -
CLEAN DIESEL TECHNOLOGIES, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Nine Months Ended September 30, 2004 2003 ---------- ----------- OPERATING ACTIVITIES Net loss $ (2,936) $ (2,156) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 95 59 Changes in operating assets and liabilities: Accounts receivable (63) 133 Inventories (123) 15 Other current assets 10 13 Accounts payable and accrued expenses 347 163 ---------- ----------- Net cash used in operating activities (2,670) (1,773) ---------- ----------- INVESTING ACTIVITIES Patent costs (82) (142) Purchase of fixed assets (143) (39) ---------- ----------- Net cash used in investing activities (225) (181) ---------- ----------- FINANCING ACTIVITIES Proceeds from issuance of common stock, net 1,785 3,865 Proceeds from broker fee credit (2003 fundraising) 3 -- ---------- ----------- Net cash provided by financing activities 1,788 3,865 ---------- ----------- NET (DECREASE)INCREASE IN CASH AND CASH EQUIVALENTS (1,107) 1,911 ---------- ----------- Cash and cash equivalents at beginning of period 6,515 2,083 ---------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,408 $ 3,994 ========== ===========
See notes to condensed financial statements. - 5 - CLEAN DIESEL TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2004 (Unaudited) NOTE 1: BASIS OF PRESENTATION The accompanying unaudited, condensed, consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature. Operating results for the nine-month period ended September 30, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all the information and notes required by generally accepted accounting principles for complete financial statement presentation. For further information, refer to the Financial Statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. Clean Diesel Technologies, Inc. (the "Company" or "CDTI") was incorporated in the State of Delaware on January 19, 1994, as a wholly owned subsidiary of Fuel-Tech N.V. ("Fuel Tech"). Effective December 12, 1995, Fuel Tech completed a Rights Offering of the Company's Common Stock that reduced its ownership in the Company to 27.6%. Fuel Tech currently holds an 10.7% interest in the Company as of September 30, 2004. The Company is a specialty chemical and energy technology company supplying fuel additives and proprietary systems that reduce harmful emissions from internal combustion engines while improving fuel economy. The Company's Platinum Plus FBC fuel additive is registered with the EPA for on-highway use. The Platinum Plus FBC in combination with a diesel oxidation catalyst or a catalyzed wire mesh filter have both been verified by the EPA for retrofit emission reduction. The success of the Company's technologies will depend upon the market acceptance of the technologies and governmental regulations including corresponding foreign and state agencies. NOTE 2: SIGNIFICANT ACCOUNTING POLICIES INVENTORIES Inventories including raw materials and finished product are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. As of September 30, 2004 $189,000 of finished goods and $254,000 of raw materials were on hand. REVENUE RECOGNITION CDT recognizes revenue from the sale of Platinum Plus FBC, Purifier, CWMF and ARIS 2000 systems upon shipment. The Company sells to end user fleets, resellers, and additive distribution companies primarily in the U.S. One-time license revenue fees are recorded in the period the license agreement is completed and if there are no significant ongoing services required to be performed in the future. Royalty revenue is recognized when earned. In December 2002, Clean Diesel Technologies completed an additional exclusive license agreement with Mitsui for the mobile ARIS technology for Japan. Under terms of the agreement Mitsui agreed to pay CDT a $250,000 license fee and Mitsui committed to spend an additional $200,000 in developing, testing and demonstrating ARIS mobile prototypes. CDT recognized the $250,000 license revenue in the fourth quarter of 2002, as there were no significant ongoing services required to be performed by CDT at that time. The Company will also receive ongoing royalty payments on a per unit basis. - 6 - In April 2003, Clean Diesel Technologies completed a non-exclusive license agreement with Combustion Component Associates Inc. (CCA) of Monroe, Connecticut, for the mobile ARIS technology in the US. Under terms of the agreement CCA agreed to pay CDT a $150,000 license fee and committed to spend an additional $100,000 in developing, testing and demonstrating ARIS mobile prototypes. CDT will also receive ongoing royalty payments on a per unit basis. CDT recognized the $150,000 license revenue in the second quarter of 2003, as there were no significant ongoing services required to be performed by CDT at that time. RESEARCH AND DEVELOPMENT COSTS Costs relating to the research, development and testing of products including verification expenses for testing programs with the California Air Resources Board (CARB) and the Environmental Protection Agency (EPA), are charged to operations as they are incurred. These costs include test programs, salary and benefits, consultancy fees, materials and certain testing equipment. PATENT EXPENSE Effective January 1, 2002, CDT began capitalizing all direct incremental costs associated with initial patent filing costs and amortized such cost over the remaining life of each patent. Patents are reviewed regularly and any patents deemed not commercially feasible or cost effective are removed and the cumulative capitalized cost is written off at that time. Prior to this all patent related costs were expensed as incurred. The expiration of CDT's U.S. patents range from 2007 to 2022 while several of the initial international patents expire in 2005. STOCKHOLDERS' EQUITY Pursuant to a Regulation S exemption with respect to an offshore placement, Clean Diesel Technologies sold, effective September 28, 2004, 1,000,000 shares of its Common Stock. The price of the Common Stock was 1.025 sterling (GBP) per share (approximately $1.82 per share). The proceeds of the Common Stock issuance, was $1.785 million (net of $65,000 in expenses). Pursuant to a Regulation S exemption with respect to an offshore placement, Clean Diesel Technologies sold, effective December 1, 2003, 1,282,600 shares of its Common Stock. The price of the Common Stock was 1.70 sterling (GBP) per share (approximately $2.92 per share). The proceeds of the Common Stock issuance, was $3.583 million (net of $170,000 in expenses). Pursuant to a Regulation S exemption with respect to an offshore placement, Clean Diesel Technologies sold, effective September 26, 2003, 2,395,597 shares of its Common Stock. The price of the Common Stock was $1.63 per share. The proceeds of the Common Stock issuance was $3.866 million (net of $39,000 in expenses). STOCK-BASED COMPENSATION Clean Diesel Technologies accounts for stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Under CDT's current plan, options may be granted at not less than the fair market value on the date of grant and therefore no compensation expense is recognized for the stock options granted to employees. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has adopted the disclosure requirements of SFAS 148 on December 31, 2002. If compensation expense for CDT's plan had been determined based on the fair value at the grant dates for awards under its plan, consistent with the method described in SFAS No. 123, CDT's net loss and basic and diluted loss per common share would have been increased to the pro forma amounts indicated below for the three months and nine months ended September 30: - 7 -
Third Quarter Nine months YTD 2004 2003 2004 2003 --------- --------- -------- -------- Net loss attributable to common stockholders as $ (1,243) $ (664) $(2,936) $(2,156) reported Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (140) (406) 463) (791) --------- --------- -------- -------- Pro forma net loss (1,383) (1,070) (3,399) (2,534) Net loss per share: Basic and diluted loss per common share-as reported $ (0.08) $ (0.05) (0.19) $ (0.18) Basic and diluted per common share-pro forma $ (0.09) $ (0.09) $ (0.22) $ (0.21)
In accordance with the provisions of SFAS No. 123, for purposes of the pro forma disclosures the estimated fair value of the options is amortized over the option vesting period. The application of the pro forma disclosures presented above are not representative of the effects SFAS No. 123 may have on operating results and earnings (loss) per share in future periods due to the timing of stock option grants and considering that options vest over a period of three years. The fair value of each option grant, for pro forma disclosure purposes, was estimated on the date of grant using the modified Black-Scholes option-pricing model with the following weighted-average assumptions for the 2004 grants, expected dividend yield 0%, risk free interest rate 5.05%, expected volatility 99.41% and expected life of the option 4 years. 35,000 options were granted in the first quarter of 2004 at an estimated value of $69,700 and 150,000 options were granted in the third quarter of 2004 at an estimated value of $194,800. LOSS PER SHARE Employee stock options and stock purchase warrants were not included in the computation of diluted loss per share for 2004 or 2003, because the Company reported a loss for the period and the effect would be anti-dilutive. Total potential dilutive employee stock options and warrants outstanding at the end of the third quarter were 2,385,000 and 532,000 respectively. NOTE 3: RELATED PARTY TRANSACTIONS The Company has a Management and Services Agreement with Fuel Tech. The agreement requires CDT to reimburse Fuel Tech for management, services and administrative expenses incurred on our behalf. The Company has agreed to pay Fuel Tech a fee equal to an additional 3% of the costs paid on behalf of administration (approximately $500 and $1,500 for the quarter and nine months year to date. Currently, and for the last three years CDT has reimbursed Fuel Tech for the expenses associated with one Fuel Tech officer/director who also serves as an officer/director of CDT. The Company believes the charges under the Management and Services Agreement are reasonable and fair. The Management and Services Agreement may be cancelled by either party by notifying the other in writing of the cancellation on or before May 15 in any year. The Company had a deferred salary plan with its former Chief Executive Officer in which he deferred $62,500 of his annual salary until the Company reaches $5 million in revenue. This agreement was terminated in March 2001 and the executive's salary was returned to full pay. At September 30, 2004 total obligations were $135,400 pertaining to this plan. This expense has been classified as a current liability on the balance sheet as of September 30, 2004 and was exchanged for 73,587 shares of common stock in October 2004 (see Note 6 Subsequent Events ). The Company has made annual pension payments or accruals pursuant to a deferred compensation plan. Until June 15, 2003, CDT made annual accruals in amounts of up to $50,000 for the former Chief Executive Officer for his post-retirement benefit upon his retirement or when the Company reaches $5 million in sales. At September 30, 2004, total obligations were $305,616 pertaining to this plan. This expense has been - 8 - classified as a current liability on the balance sheet as of September 30, 2004. The Company paid its total obligation under the plan in October 2004 (see Note 6 Subsequent Events). NOTE 4: COMMITMENTS Clean Diesel Technologies has signed a lease at 300 Atlantic Street, Stamford, Connecticut for 3,925 square feet of administrative space. The 5 year lease through March 2009, will have an annual cost of approximately $116,000, including rent, utilities and parking. CDT has signed a four year lease (through July 2008) for 2,750 square feet of warehouse space in Milford, CT. Annual rent including utilities will be approximately $21,000. Effective October 28, 1994, Fuel Tech granted two licenses to the Company for all patents and rights associated with its platinum fuel catalyst technology. Effective November 24, 1997, the licenses were canceled and Fuel Tech assigned to the Company all such patents and rights on terms substantially similar to the licenses. In exchange for the assignment, the Company will pay Fuel Tech a royalty of 2.5% of its annual gross revenue from sales of the platinum fuel catalysts commencing in 1998. The royalty obligation expires in 2008. The Company may terminate the royalty obligation to Fuel Tech by payment of $5,454,546 in 2004 and declining annually to $ 4,363,637 in 2005, $3,272,728 in 2006, $2,181,819 in 2007 and $1,090,910 in 2008. The Company as assignee and owner is responsible for maintaining the technology at its own expense. Minimum royalties were paid to Fuel Tech in 2003 and royalties payable to Fuel Tech at September 30, 2004 are $4,950. NOTE 5: CONCENTRATION For the quarter ended September 30, 2004, two customers accounted for 61% of the Company's revenue and for the year to date period ending September 30, 2004 one customer accounted for 43% of total revenue. For the comparable nine month period in 2003, a different single customer accounted for 31% of the Company's revenue. NOTE 6: SUBSEQUENT EVENTS In October 2004 the Company completed an additional private placement of its Common Stock Pursuant to a Regulation S exemption with respect to an offshore placement. Clean Diesel Technologies sold 426,500 shares of its Common Stock at a price of 1.025 sterling (GBP) per share (approximately $1.83 per share). The proceeds of the Common Stock issuance, was $750,000 (net of $25,000 in expenses). As part of that transaction, retired CEO Jeremy Peter-Hoblyn exchanged his deferred salary of $135,400 for 73,587 shares of CDT common stock. Also in October of 2004 the Company paid as required under a deferred Compensation Plan, its retired CEO Jeremy Peter-Hoblyn all of his accrued pension of $305,500. - 9 - CLEAN DIESEL TECHNOLOGIES, INC. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS Statements in this Form 10-Q that are not historical facts, so-called "forward-looking statements," are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in the Company's filings with the Securities and Exchange Commission. See "Risk Factors of the Business" in Item 1, "Business," and also Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. RESULTS OF OPERATIONS 2004 VERSUS 2003 Product sales and cost of sales were $223,000 and $149,000 respectively for the third quarter of 2004 versus $81,000 and $47,000 for 2003. Platinum Plus fuel catalyst sales of $89,000 and $58,000 were recorded in the third quarter of 2004 and 2003, respectively and Platinum Plus purifier system sales of $85,000 and $0 were recorded in the third quarter of 2004 and 2003 respectively. ARIS product sales of $43,000 and $12,000, primarily to Mitsui & Co., Ltd., were recorded in the third quarter of 2004 and 2003, respectively. Included in both the 2004 and 2003 third quarter revenue is $18,000 of license and royalty income. The 2004 license and royalty income is from continuing ARIS system royalties from Mitsui & Co., Ltd and the 2003 royalty income is from RJM. For the nine months ended September 30, product sales and cost of sales were $479,000 and $334,000 respectively for 2004 versus $291,000 and $167,000 for 2003. Platinum Plus fuel catalyst sales of $199,000 and $138,000 were recorded in the first nine months of 2004 and 2003, respectively and Platinum Plus Purifier system sales of $95,000 and $0 respectively in 2004 and 2003. ARIS product sales of $177,000 and $87,000, were recorded year-to-date in 2004 and 2003 respectively. Included in first nine months of total revenue is $49,000 and $187,000 of license and royalty income for 2004 and 2003, respectively. General and administrative expenses increased $633,000 to $1,150,000 in the third quarter 2004 versus $517,000 in the same period of 2003. For the first 9 months of 2004, general and administrative expenses increased $906,000 to $2,761,000 from $1,855,000 in the same 2003 period. The year-to-date 2004 increase in general and administrative expenses is related to the third quarter write off of $275,000 for legal and advisory expenses associated with a potential stock registration and increases in marketing and sales activities, primarily personnel and related costs of $400,000 in the US and Europe. Research and development expenses increased $3,000 to $174,000 in the third quarter 2004 versus $171,000 in the comparable 2003 period. For the nine months to date research and development expenses have decreased $246,000 to $344,000 from $590,000 which were incurred in 2003. The decrease is attributable to the verification and certification program expenses for the Platinum Plus FBC in 2003. Patent amortization and other costs were $22,000 in the third quarter of 2004 versus $29,000 in the comparable 2003 period. The year-to-date increase in 2004 is $32,000. The increase is related to the change in capitalization policy and the write-off of several patents in 2004. - 10 - Third quarter interest income increased $10,000 in 2004 to $11,000 versus $1,000 in the comparable period in 2003. Year-to-date interest has increased $29,000 to $36,000 versus $7,000 for the 2003 period. This was a result of an increase in the amount of cash and cash equivalents on hand in 2004. LIQUIDITY AND SOURCES OF CAPITAL Prior to 2000, the Company was primarily engaged in research and development and has incurred losses since inception aggregating $28,208,000 (excluding the effect of the non-cash preferred stock dividends). The Company expects to incur losses through the foreseeable future as it further pursues its commercialization efforts. Although the Company started selling limited quantities of Platinum Plus additive and the verified Purifier system and generating some ARIS licensing fees and royalties, operating revenue to date has been insufficient to cover operating expenses, and the Company continues to be dependent upon proceeds from fund raising to finance its working capital requirements. For the nine months ended September 30, 2004 and 2003, the Company used cash of $2,731,000 and $1,773,000 respectively, in operating activities. At September 30, 2004 and December 31, 2003, the Company had cash and cash equivalents of $5,408,000 and $6,515,000, respectively. The decrease in cash and cash equivalents in 2004 was the result of building of inventories, capital expenditures for equipment and new administrative offices and on-going marketing and operation costs, primarily related to personnel costs. The Company anticipates incurring additional losses through at least 2004 as it further pursues its commercialization efforts. In September 2004, Clean Diesel Technologies received $1.785 million (net of $65,000 in expenses) through a private placement of 1,000,000 shares of its Common Stock. The price of the Common Stock was 1.025 GBP per share (approximately $1.82 per share). The proceeds of the Common Stock issuance are being used for the general corporate purposes of Clean Diesel Technologies. In December 2003, Clean Diesel Technologies received $3.583 million (net of $170,000 in expenses) through a private placement of 1,282,600 shares of its Common Stock. The price of the Common Stock was 1.70 GBP per share (approximately $2.92 per share). In September 2003, Clean Diesel Technologies received $3.866 million (net of $39,000 in expenses) through a private placement of 2,395,597 shares of its Common Stock. In conjunction with the private placement, 230,240 ten year warrants with an exercise price of $1.63 per share were issued. At the present time, the Company cannot estimate when, or if, its operations will generate positive cash flows from operations. The Company does not have any credit facilities available with financial institutions or other third parties if the Company cannot generate cash flow from operations, CDT will be dependent upon external sources of best-efforts financing, of which there are no firm commitments or arrangements. Based on the current operating plan, management believes that the cash balance as of September 30, 2004 of $5.4 million along with the $750,000 raised in October 2004 (see subsequent events section) will be sufficient to meet the cash needs into the second quarter of 2006. In the future, unless the operating revenues are sufficient to meet operating expenses, the Company may need to access capital markets to fund operations by incurring indebtedness or issuing equity securities. The Company can provide no assurance that it will be successful in any future financing effort to obtain the necessary working capital to support operations. If Management is unable to obtain the necessary financing from external sources, the Company may need to manage any cash shortfalls by taking measures which may include deferring or reducing the scope of commercialization efforts, reducing costs and overhead expenses, or otherwise curtailing operations, or obtaining funds by a disposition of assets or through arrangements with others that may require CDT to relinquish rights to certain of our technologies, or to license the rights to such technologies on terms that are less favorable to than might otherwise be available. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the opinion of management, with the exception of exposure to fluctuations in the cost of platinum, the Company is not subject to any significant market risk exposure. - 11 - The Company generally receives all income in United States dollars. The Company typically makes several payments monthly in various foreign currencies for patent expenses, product tests and registration, local marketing and promotion, consultants and one employee. ITEM 4. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in the Company's filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The Company's management, with the participation of its principal executive and financial officers, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this Quarterly Report on form 10Q. The Company's principal executive and financial officers have concluded, based on such evaluation, that such disclosure controls and procedures were effective for the purpose for which they were designed as of the end of such period. There was no change in the Company's internal control over financial reporting that was identified in connection with such evaluation that occurred during the period covered by this Quarterly Report on form 10Q that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. - 12 - PART II. OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K a. Exhibits None b. Reports on Form 8-K On August 26, 2004 the Company announced the appointment of Dr. Bernhard Steiner as CEO and director and at the same time the Retirement of CEO Jeremy Peter-Hoblyn who remains on the Board of Directors. On September 20, 2004 the Company reported a commitment to sell and issue under the exemption from registration of Regulation S, 1 million shares of the company's common stock for 1.025 GBP (approximately $1.82). On October 5, 2004 the Company reported a commitment to sell and issue under the exemption from registration of Regulation S, 426,500 shares of the company's common stock for 1.025 GBP (approximately $1.82). - 13 - CLEAN DIESEL TECHNOLOGIES, INC. SIGNATURES & CERTIFICATIONS Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 11, 2004 By: /s/ Bernhard Steiner ---------------------------- Bernhard Steiner Director and Chief Executive Officer Date: November 11, 2004 By: /s/ David W. Whitwell ---------------------------- David W. Whitwell Chief Financial Officer, Vice President and Treasurer - 14 -